Personal lines is a competitive space but Mike Smart, business development director at BAE Systems Applied Intelligence, believes that the first movers to tackle dual pricing and look at business structure will be the winners in the long run.
Oh to be a ‘new’ customer. When it comes to big ticket items – furniture, cars and the like, the thrill of choosing some highly-polished new lifestyle accessory and then tracking down a real bargain is a rare treat. Even better, merchants and providers compete for your attention – and the contents of your bank account. You can pick the best deal from a wide range of options.
But consider also the long-term purchases, the ones that roll on year after year. Maybe I’m old school, but if I’m staying loyal to a supplier for any length of time, I normally expect some sort of recognition. This reward – real or perceived – could be a discount on future purchases, perhaps, or a loyalty card that entitles me to some sort of favourable treatment. Yet the insurance market doesn’t seem to work like this.
What happens in the general insurance market? Consumers are in for a pleasant surprise if they’re about to renew a policy and are happy to go to another insurer or broker. They’ll be welcomed with open arms and offered great discounts. There’s rarely reward in a simple renewal – in fact, you’ll invariably end up paying more. Loyal policyholders who renew year-after-year are left subsidising the new customers who flit to and fro between providers in search of the best deal.
These same insurers and brokers bemoan about the cost of acquiring new customers. But it doesn’t take a rocket scientist to figure out that they’ve had a hand in creating the very same stick that they are being beaten with. Insurers and aggregators alike are providing customers with a strong incentive to churn and switch providers as often as possible.
The market is wasting hundreds of millions of pounds on advertising preferential rates to new customers, and customers are footing the bill. To compound matters we have to waste time shopping around to take advantage of these deals, which more often than not undercut renewal quotes. Needless to say, shopping for insurance rarely matches the thrill of buying a new car, holiday or sofa. It’s often seen as a chore: a piece of drudgery too endure because insurers are putting up prices – again.
To compound the problem, providers levy administration charges for adjusting policies. These charges are frequently pretty arbitrary and not proportional to costs incurred. Bluntly, they often subsidise advertised low cost policy premiums. Policyholders can - or at least should be able to – make policy changes themselves over the internet at very little administrative cost to the provider. These charges are simply a way of recovering reduced premiums to attract new business. It’s not correct, and those of us who have worked in the industry for any length of time know it.
So what can be done? First – all renewal notices should be sent out with not only a reminder of what last year’s premium was but also clearly state what the best price being offered to a new customer would be. To avoid perplexed policyholders phoning call centres at premium rates for an explanation, perhaps one could also add a short write-up as to why, in the event, a new customer would be offered a better price for the same risk.
If there’s no good reason to penalise an existing loyal customer and the unjustifiable differentiation in pricing is removed then perhaps providers might choose to look more closely at the services they provide. Instead of creating churn, which is costing a fortune in marketing expense, suppliers might actually rely more on delivering first class customer satisfaction to retain their customers. They might, as a result, also be pleasantly surprised to learn that customers who believe that they are being treated fairly may choose to extend their relationship by adding further policies to their portfolio.
Second – policy administration costs clearly form part of overall policy pricing and these costs are built into premiums. At best it is disingenuous to artificially reduce premiums in the expectation that the subsidised price can be funded later through charging administration fees over and above genuine premium adjustments for mid-term adjustments. Once you are a policyholder you have no alternative but to pay these admin fees, added to which the structure of cancellation fees leave little alternative but to pay them.
Technically there is no good reason why all basic personal lines business cannot be transacted over the internet, not only for new business but also to handle mid-term adjustments. All policies should come with it written in large whether the chosen supplier will provide a low/zero cost ongoing policy administration function. The consumer can then make a more informed choice; odds are that most would opt to do business with an insurer that provides 24/7 online access. Doubtless as these suppliers will also be able to provide lower cost premiums as their administration costs would be substantially reduced. So greater convenience and lower premiums – sounds like a decent marketing proposition.
I fully appreciate that the personal lines market is highly competitive, but the structure needs to be looked at. Businesses following the suggestions above are likely to have a first mover advantage, especially in part of the market where transparency and clarity, not low upfront cost, set quality service oriented insurers and brokers apart from the herd. Aggressive introductory pricing is ultimately of limited benefit to the sales entity if the retention rates fall and is in truth only encouraging customers to be disloyal and move around. Fair, transparent and equitable pricing benefits everyone.